Just over a decade ago, when Quebec-based Bombardier Recreational Products Inc. (BRP) decided to try Mexico as a manufacturing market, the off-road vehicle manufacturer took a measured approach. In 2003, BRP tested the waters by leasing a facility in Ciudad Juarez, Chihuahua, to assemble outboard engines for export. Two years later, the Canadian firm decided to transfer all of its ATV assembly and engine manufacturing operations to Juarez.

Building on its first, successful ventures south of the border, over the last decade BRP has steadily increased its stake in Mexico to more than $190 million worth of manufacturing facilities in the states of Chihuahua and Querétaro, and an extensive distributor network.

“Mexico has really burst on the scene as a legitimate player in the global manufacturing sector,”
says Bob Cook, president and CEO of the El Paso, Texas-based Cook Strategies Group, LLC.
“Every trend I look at indicates that rise is going to continue.”

Ford

BMW

Goodyear

Toyota

Mazda

Hundyai/Kia

Nissan/Daimler

Honda

Audi

San Hosé, Chiapa

Agreeing with that prediction, the Boston Consulting Group estimated in a 2013 report that
Mexican manufacturing exports will increase up to $60 billion annually by 2018.

According to Banco de Mexico data, Mexico has received over $135 billion in foreign direct
investment (FDI) over the last five years — almost $86 billion of that within the past three years.
The largest share of FDI in Mexico comes from the United States, representing over one third (34
percent) of total FDI over the past three years. Canada has been the source of another 10 percent
of FDI in Mexico over the same period.

More than half (58.6 percent) of the FDI coming into Mexico was invested in manufacturing
enterprises, with the top five sectors being food and beverages; transportation equipment; chemicals;
electronics; and electric equipment. The automotive sector alone added more than 93,000
jobs in 2014, growing nearly 15 percent.

However, the growth trend has also been “pretty diverse,” Cook says. “We’ve seen a lot of
growth the across the board,” a trend which bodes well for the country’s economic future. The
most pronounced growth has taken place in “high value” categories such as aerospace, automotive,
and electronics.

Mexican manufacturing exports are estimated to increase by up to $60 billion annually by 2018. An Automotive Powerhouse
This tsunami of foreign investment has transformed Mexico into the world’s seventh-largest
automotive producer and the fourth-largest exporter after Germany, Japan, and South Korea.
Mexico has usurped Japan to become the
No. 2 supplier of vehicles to the U.S. market,
behind Canada. By 2018, industry
analysts predict Mexico’s current annual
production of 3.2 million cars and light
trucks to increase more than 50 percent
to five million vehicles. Earlier this year,
The Wall Street Journal reported that seven
Asian and European automakers have
opened new Mexican assembly plants,
or announced plans, in just over a year.
Other car companies have bankrolled
major expansions in Mexico, including Nissan, General Motors, Ford, Volkswagen, and Fiat Chrysler
Automobiles NV.

In total, automakers and parts suppliers have earmarked
more than $20 billion of new investments, Mexican officials
say. The automakers’ presence has also spawned major growth
of smaller vendors who supply the auto plants, according
to Cushman and Wakefield’s Gonzalo Gutierrez, who is the
firm’s senior director of Industrial Brokerage Services for the
Northeast Region of Mexico, based
in Monterrey. These vendors come
from all over the world, but most
hail from the U.S., Japan, Germany
and, more recently, Korea, Gutierrez
says.

Meanwhile, recreational vehicle
maker BRP has gradually upped
the ante on its Mexican investment.
In 2013, BRP opened a $100 million
manufacturing facility in Querétaro,
which employs 1,100 people. Last
year, BRP decided to build a second
plant in Juarez, to expand its
Can-Am product offering and meet
future demand for off-road vehicles. When completed in late
2017, the $55 million facility is expected to employ about 900
workers.

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Recent Automotive Industry Announcements/Openings in Mexico

Aerospace, Electronics, and Medical Devices
The aerospace sector in Mexico has also been growing rapidly.
Last year, Mexico exported an estimated $1.9 billion worth of
aerospace products to the U.S., an amount that has quadrupled
since 2009, Cook notes. In that sector, “Mexico is rapidly moving
up the global rankings.”

Regarding regional distribution of FDI, just over half accrues
to Mexico City and the surrounding state, according to Cook.
About a third of the balance goes to the four states of Chihuahua,
Jalisco, Puebla, and Nuevo Leon.

In addition to being an automotive center, the border city of
Juarez has become a manufacturing center for electronics and
medical devices. Its electronics manufacturers include Electrolux,
Flextronics, Foxconn, and Lexmark. Its medical device
companies include Cardinal Health, GE, and Johnson and Johnson.
Other northern states have benefited from the growth of
the electronics industry, including Chihuahua, Baja California,
and Tamaulipas.

Mexico’s developing manufacturing clusters have also
drawn smaller companies. One example is Greatbatch Inc.,
which plans to move 170 jobs from its Electrochem Solutions
Inc. manufacturing facility in Beaverton, Ore., to a new plant in
Tijuana (Baja California) by year’s end.

The southern Mexican region has also benefited from lower
labor costs, which have helped attract clothing and textile manufacturers
to cities including Campeche and Veracruz.

Boosting Mexico’s Natural Advantages
There have been a multitude of reasons for Mexico’s manufacturing
boom, including both indigenous advantages, and
efforts by the government in recent years to make the country a
more desirable trade partner and place to do business. Over the
past decade, Mexico “has been pretty aggressive in liberalizing
trade with companies around the world,” and has the most
free-trade agreements of any country in the world — 44, Cook
points out.

The Mexican government has been proactive in modernizing the country's business climate to 21st century standards.
Mexico’s homegrown business
advantages include lower transportation
and warehousing costs, an
improved ability to respond to customer
demands, improved control of
intellectual property, the availability
of proximate time zones between
management and production locales,
and the cultural similarities between
the U.S. and Mexican markets.

Augmenting Mexico’s expansive,
free-trade policies, the government
has also been proactive in modernizing
the country’s business climate to
21st century standards. Investing in education has been a major
thrust to ensure a well-prepared, bilingual workforce.

BRP facility in Querétaro
Another priority has been improving Mexico’s roads,
bridges, and utility infrastructure to help expedite the flow of
materials and manufactured goods. Revisions in the country’s
energy policy have encouraged private-sector investment in
new natural gas pipelines and power lines. Additionally, earlier
this year, AT&T announced plans to invest $3 billion to extend
its high-speed mobile Internet service to Mexico and cover 100
million consumers and businesses by year-end 2018.

Mexico also continues to benefit from the near-shoring trend
among some American companies — i.e., moving manufacturing
operations to Mexico from China and other low-cost countries.
Average manufacturing labor costs in Mexico are now
almost 20 percent lower than in China — a sea change from 15
years ago, when Mexico’s labor costs were 58 percent more expensive
than China’s, according to Forbes.com.

Are there other supply chain issues in Mexico companies
need to be aware of? “There are no critical issues related to
transportation inside Mexico,” Gutierrez says. “Since the last
five years, the 3PL companies, such as the companies with
distribution centers in multiple (Mexican) states, have handled
their operations with no inconvenient events, while they have significantly increased their operations, every year.”

Some Challenges Ahead
Of course, crime and violence, much of it related to the illegal
drug trade, remain a concern. However, media reports may
exaggerate the hazards. Gutierrez notes that companies doing
business south of the border have developed effective, operational
planning strategies to minimize risk and avoid travel related
hazards in problematical regions.

Yet, with such a rapid economic expansion, some growing
pains are to be expected. There are several challenges facing the
country, which the current Mexican administration is working
to address, according to Cook, in order to help promote continued
economic growth.

Competition for skilled labor can be expected to heat up,
along with the overall economy. “If you need specialized engineers
and technology, you will not find them along the border;
you need to go closer to Mexico City,” notes Sylvain Blanchette,
BRP’s VP of Mexican operations. Generally, the average cost of
labor increases moving south from the border to the country’s
interior. That may be due to more competition for skilled labor,
due to the increased number of auto, aerospace, and other
manufacturers, says Blanchette.

To sustain its manufacturing expansion, Mexico is going
to need “to have an even greater emphasis on skilled labor,”
Cook says. However, in spite of the challenges ahead, Mexico’s
ascendance as a global economic power should continue, Cook
believes, citing its globally competitive cost structure, young
workforce, and friendly trade policies.

Mexico’s richest resource — and the real driving force behind
the growth boom — may be its people, says Blanchette,
who praises the knowledge, enthusiasm, and initiative of the
Mexican workforce. “When we have come to Mexico with
projects, the people we work with have been extremely eager to
learn and improve what they do,” Blanchette concludes.

Dan Emerson, Staff Editor, Area Development

Based in Minneapolis, Dan Emerson has been a freelance writer for business, trade, and consumer publications since 1994.